[lbo-talk] Risky money market funds?

joanna 123hop at comcast.net
Sun Aug 19 21:23:19 PDT 2007


Carl Remick wrote:


>
> Am I mistaken in believing MMFs are pretty much shielded from possible
> contagion by complex derivatives, or is there less transparency about
> MMFs than I'd assumed? In any event, is there any significant
> potential for an MMF panic to develop in lieu of the old-fashioned
> bank runs whose risk has been eliminated by FDIC protection?

Well, 3 weeks ago, Barron's ran an article saying that some of the mortgage garbage tranches were included in money market funds....even said that some money market funds may consist of 30% such tranches. These tranches are now basically worthless. I forget what they call them...CDO's???

In an article called "Even after 1 trillion goes poof, it ain't over," Randall Forsyth writes:

[snip]

"Nevertheless, the lack of transparency for the new esoteric instruments, such as collateralized debt obligations and collateralized loan obligations, has exacerbated the current nervousness because nobody knows what they're worth, he also notes.

In that, it appears some of the problem lies with asset-backed commercial paper "conduits" and so-called structured investment vehicles. These ABCP conduits and SIVs are used to fund the purchase of assets such as trade receivables, auto loans, credit cards, whole mortgage loans, as well as securities such as corporate debt, residential mortgage-backed securities and CDOs, according to a Bear Stearns report.

The ABCP conduits and the SIVs then are able to issue high-grade commercial paper to finance these assets, which are less the prime quality. ABCP now comprises over half the $2 trillion-plus commercial paper market, up from 20% in 1998, according to MacroMavens' Stephanie Pomboy. And, money market funds own 27% of all CP outstanding, she also notes.

According to the Bear report, some $38 billion-$43 billion RMBS and CDOs could be liquidated from ABCP conduits. Got that? In other words, a load of these assets is backing ABCP and may have to be sold into a less than receptive market."

[snip]

This was published August 9th in the online Barron's.

After reading this, I had a Chicken Little moment and moved all the $ I had in money market funds into 6 month T bills. But, you know, I'm a timid soul.

Joanna



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